Reinsurers on the hook for hurricane Michael losses

Reinsurers are likely to bear the brunt of the losses caused by hurricane Michael, KBW's Meyer Shields suggested in a research note.

Michael made landfall Wednesday, Oct. 10 afternoon as a category 4 storm near Mexico Beach, Florida with 155mph (250km/h) winds. Michael is the strongest hurricane to hit the Florida Panhandle since 1900 and the strongest hurricane to make landfall in the US since Hurricane Andrew in 1992, according to data provider CoreLogic.

While Shields has been surprised by insurance stocks' resilience but he is most concerned about the reinsurers.

Florida's fragmented personal property market is typically heavily reinsured at relatively low attachment points, Shields said. Michael's speed implies less accumulated inland rainfall, implying proportionately more property than auto losses, and in turn implying greater reinsurance exposure, he explained.

Shields thinks that the industry's year-to-date M&A uptick has also driven actual and potential acquisition targets to buy more reinsurance protection.

AM Best noted that insurance companies with the largest market shares in the impacted area are large, national writers such as GEICO (Berkshire Hathaway), State Farm, and Progressive. These companies have the balance sheet capacity and support via reinsurance to withstand the level of losses they can expect with respect to their portfolios without a significant impact, the agency said. For smaller companies, especially single-state Florida writers whose portfolios are comprised predominantly of property catastrophe-exposed lines of coverage (particularly homeowners), the potential impact from hurricane Michael losses is more critical, according to the agency.

Many of the AM Best-rated entities have intentionally structured comprehensive reinsurance programmes to limit the balance sheet impact of hurricanes, with retentions creating primarily an earnings event, AM Best noted.

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